Hampel: Rate drop may be last—unless economy worsens

MADISON, Wis. (5/1/08)--Credit unions may expect that Wednesday's 25-basis point drop in the target for the fed funds rate will be the last rate cut, pending no other economic downturns, says Bill Hampel, chief economist with the Credit Union National Association (CUNA).

In a widely anticipated move, the Federal Reserve's Open Market Committee lowered the target for the federal funds rate, at which banks borrow from each other, by 25 basis points to 2%. That's the lowest rate since late 2004.

The Fed also lowered the discount rate, at which banks borrow from the Fed, by 25 basis points to 2.25%.

What does this mean for credit unions? "We continue to expect strong savings inflows and modest loan growth the rest of the year," Hampel said.

"The fact that short-term interest rates have fallen below longer-term rates will provide a little bottom-line relief, but probably not enough to counter increases in loan losses at most credit unions," he added.

The rate cut coincided with Wednesday's report on the Gross Domestic Product (GDP). "The GDP report, which shows an economy sputtering into a so-far mild recession, and the Open Market Committee's assertion that it has now substantially eased monetary policy, suggests that this will be the last rate reduction by the Fed unless the economy takes a further turn for the worse," Hampel told News Now.

In a statement following the meeting, the Fed said the economy "remains weak," with subdued consumer and business spending and soft job markets. The central bank said it expects the housing slump and credit crunch to continue dampening economic growth during the remainder of the year.

However, Fed policymakers also said they were concerned about higher inflation. "The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation remains high. It will be necessary to continue to monitor inflation developments carefully.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability," the Fed said.

Credit unions can find out more in CUNA's "CU Response to the Current Economy" webinar series scheduled for 1-2:30 p.m. CDT Thursdays. Today's session will feature National Credit Union Administration (NCUA) Board Member Gigi Hyland and Dave Marquis, director of NCUA's office of examination and insurance, discussing the economic downturn and its impact on credit unions from a regulatory compliance standpoint. Use the resource link for more information.

Resource Links

CUNA webinar: CU Response to the Current Economy

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